Audit and Accounting Guide: Gaming 2018

By AICPA

Most of the accounting and financial reporting practices of entities undertaking gaming or gaming-related activities (collectively referred to as "gaming entities") are essentially the same as those of other industries. However, some activities of gaming entities are unique.

Developed by leading experts, this guide delivers "how-to" strategies for handling audit and accounting issues common to entities in the gaming industry, so accounts and financial managers can provide high-quality services to their clients. Updated for recent auditing standards, this guide summarizes new standards, guidance and practices, explaining the numerous activities specific to gaming entities and provides information regarding accounting and auditing for many types of gaming industry issues. Also included are illustrative independent auditor's reports and financial statements of both a non-governmental gaming entity and a governmental gaming entity.

Key benefits include:

• Provides important technical guidance, summarizes new standards and practices, and delivers how-to advice for handling audit and accounting issues that will be critical to your success.
• Offers clear and practical guidance on recent developments in areas such as online gaming and governmental gaming entities.
• Includes helpful industry coverage of the New Jersey Casino Redevelopment Authority, currency transaction reporting in the gaming industry, the tribal gaming industry, lotteries, and analytical procedures and internal controls unique to the gaming industry.
• Includes an appendix that highlights FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).
• Includes an appendix that contains the finalized revenue recognition implementation issues specific to gaming entities.

• Language: English
• Publisher: Wiley
• Release date: Nov 27, 2018
• ISBN: 9781948306102

Book preview

Preface

(Updated as of September 1, 2018)

About AICPA Guides

This AICPA Guide has been developed by the AICPA Gaming Guide Task Force to assist practitioners in performing and reporting on their audit engagements and to assist management in the preparation of their financial statements in conformity with U.S. generally accepted accounting principles (GAAP).

An AICPA Guide containing auditing guidance related to generally accepted auditing standards (GAAS) is recognized as an interpretive publication as defined in AU-C section 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards.1 Interpretive publications are recommendations on the application of GAAS in specific circumstances, including engagements for entities in specialized industries.

Interpretive publications are issued under the authority of the AICPA Auditing Standards Board (ASB) after all ASB members have been provided an opportunity to consider and comment on whether the proposed interpretive publication is consistent with GAAS. The members of the ASB have found the auditing guidance in this guide to be consistent with existing GAAS.

Although interpretive publications are not auditing standards, AU-C section 200 requires the auditor to consider applicable interpretive publications in planning and performing the audit because interpretive publications are relevant to the proper application of GAAS in specific circumstances. If the auditor does not apply the auditing guidance in an applicable interpretive publication, the auditor should document how the requirements of GAAS were complied with in the circumstances addressed by such auditing guidance.

The ASB is the designated senior committee of the AICPA authorized to speak for the AICPA on all matters related to auditing. Conforming changes made to the auditing guidance contained in this guide are approved by the ASB chair (or his or her designee) and the director of the AICPA Audit and Attest Standards Staff. Updates made to the auditing guidance in this guide exceeding that of conforming changes are issued after all ASB members have been provided an opportunity to consider and comment on whether the guide is consistent with the Statements on Auditing Standards (SASs).

Any auditing guidance in a guide appendix or exhibit (whether a chapter or back matter appendix or exhibit), though not authoritative, is considered an other auditing publication. In applying such guidance, the auditor should, exercising professional judgment, assess the relevance and appropriateness of such guidance to the circumstances of the audit. Although the auditor determines the relevance of other auditing guidance, auditing guidance in a guide appendix or exhibit has been reviewed by the AICPA Audit and Attest Standards staff and the auditor may presume that it is appropriate.

An AICPA Guide containing attestation guidance is recognized as an interpretive publication as defined in AT-C section 105, Concepts Common to All Attestation Engagements.2 Interpretive publications are recommendations on the application of Statements on Standards for Attestation Engagements (SSAEs) in specific circumstances, including engagements for entities in specialized industries. Interpretive publications are issued under the authority of the ASB. The members of the ASB have found the attestation guidance in this guide to be consistent with existing SSAEs.

A practitioner should be aware of and consider the guidance in this AICPA Guide applicable to his or her attestation engagement. If the practitioner does not apply the guidance included in an applicable interpretive publication, the practitioner should document how the requirements of the SSAE were complied with in the circumstances addressed by such attestation guidance.

Any attestation guidance in a guide appendix or exhibit (whether a chapter or back matter appendix or exhibit), though not authoritative, is considered an other attestation publication. In applying such guidance, the practitioner should, exercising professional judgment, assess the relevance and appropriateness of such guidance to the circumstances of the engagement. Although the practitioner determines the relevance of other attestation guidance, such guidance in a guide appendix or exhibit has been reviewed by the AICPA Audit and Attest Standards staff and the practitioner may presume that it is appropriate.

The ASB and Accounting and Review Services Committee are the designated senior committees of the AICPA authorized to speak for the AICPA on all matters related to attestation in their respective areas of responsibility. Conforming changes made to the attestation guidance contained in this guide are approved by the ASB chair (or his or her designee) and the director of the AICPA Audit and Attest Standards Staff. Updates made to the attestation guidance in this guide exceeding that of conforming changes are issued after all ASB members have been provided an opportunity to consider and comment on whether the guide is consistent with the SSAEs.

The Financial Reporting Executive Committee (FinREC) is the designated senior committee of the AICPA authorized to speak for the AICPA in the areas of financial accounting and reporting. Conforming changes made to the financial accounting and reporting guidance contained in this guide are approved by the FinREC Chair (or his or her designee). Updates made to the financial accounting and reporting guidance in this guide exceeding that of conforming changes are approved by the affirmative vote of at least two-thirds of the members of FinREC.

This guide does the following:

•

Identifies certain requirements set forth in the FASB Accounting Standards Codification® (ASC) and GAAP for governmental entities.

•

Describes FinREC’s understanding of prevalent or sole industry practice concerning certain issues. In addition, this guide may indicate that FinREC expresses a preference for the prevalent or sole industry practice, or it may indicate that FinREC expresses a preference for another practice that is not the prevalent or sole industry practice; alternatively, FinREC may express no view on the matter.

•

Identifies certain other, but not necessarily all, industry practices concerning certain accounting issues without expressing FinREC’s views on them.

•

Provides guidance that has been supported by FinREC on the accounting, reporting, or disclosure treatment of transactions or events that are not set forth in FASB ASC and GAAP for governmental entities.

Accounting guidance for nongovernmental entities included in an AICPA Guide is a source of nonauthoritative accounting guidance. As discussed later in this preface, FASB ASC is the authoritative source of U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the SEC.

Accounting guidance for governmental entities included in an AICPA Guide, and cleared by GASB, is a source of authoritative GAAP described in category B of the hierarchy of GAAP for state and local governmental entities as defined in GASB Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments. The accounting provisions of this guide that have been cleared by GASB are formatted in orange font for the reader within the text of the guide and are noted in appendix A, Category B Guidance. AICPA members should be prepared to justify departures from GAAP, as discussed in the Accounting Principles Rule, (ET sec. 1.320.001 and 2.320.001).3

AICPA Guides may include certain content presented as Supplement, Appendix, or Exhibit. A supplement is a reproduction, in whole or in part, of authoritative guidance originally issued by a standard setting body (including regulatory bodies) and applicable to entities or engagements within the purview of that standard setter, independent of the authoritative status of the applicable AICPA Guide. Both appendixes and exhibits are included for informational purposes and have no authoritative status.

Recognition

2018 Guide Edition

AICPA Senior Committees

Auditing Standards Board

Michael J. Santay, Chair

Dora Burzenski, Member

Financial Reporting Executive Committee

Daniel Noll

The AICPA gratefully acknowledges those members of the Gaming Guide Task Force who reviewed or otherwise contributed to the development of this edition of the guide: Bruce Bleakman, Patrick Pruitt, Tasha Repp, and Michael Winterscheidt.

The AICPA gratefully appreciates the invaluable assistance Renee Rampulla provided in updating and maintaining the guidance in the 2018 edition of the guide.

AICPA Staff

Susan Reed

Manager

Product Management and Development — Public Accounting

Guidance Considered in This Edition

This edition of the guide has been modified by the AICPA staff to include certain changes necessary due to the issuance of authoritative guidance since the guide was originally issued (September 1, 2011, edition), and other revisions as deemed appropriate. Relevant guidance issued through September 1, 2018, has been considered in the development of this edition of the guide. However, this guide does not include all audit, accounting, reporting, regulatory, and other requirements applicable to an entity or a particular engagement. This guide is intended to be used in conjunction with all applicable sources of relevant guidance.

Relevant guidance that is issued and effective on or before September 1, 2018, is incorporated directly in the text of this guide. Relevant guidance issued but not yet effective as of September 1, 2018, but becoming effective on or before December 31, 2018, is also presented directly in the text of the guide, but shaded gray and accompanied by a footnote indicating the effective date of the new guidance. The distinct presentation of this content is intended to aid the reader in differentiating content that may not be effective for the reader’s purposes (as part of the guide’s dual guidance treatment of applicable new guidance).

Relevant guidance issued but not yet effective as of the date of the guide and not becoming effective until after December 31, 2018, is referenced in a guidance update box; that is, a box that contains summary information on the guidance issued but not yet effective.

In updating this guide, all guidance issued up to and including the following was considered, but not necessarily incorporated, as determined based on applicability:

•

FASB Accounting Standards Update (ASU) No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts

•

GASB statements, interpretations, and technical bulletins issued through September 1, 2018

•

GASB Implementation Guidance Update No. 2018-1, Implementation Guidance Update—2018, issued May 2018

•

SAS No. 133, Statement on Auditing Standards, Auditor Involvement With Exempt Offering Documents (AU-C sec. 945)

•

Statement of Position 17-1, Performing Agreed-Upon Procedures Related to Rated Exchange Act Asset-Backed Securities Third-Party Due Diligence Services as Defined by SEC Release No. 34-72936 (AUD sec. 60)4

•

SSAE No. 18, Attestation Standards: Clarification and Recodification

Users of this guide should consider guidance issued subsequent to those items listed previously to determine their effect, if any, on entities and engagements covered by this guide. In determining the applicability of recently issued guidance, its effective date should also be considered.

The changes made to this edition of the guide are identified in appendix K, Schedule of Changes Made to the Text From the Previous Edition. The changes do not include all those that might be considered necessary if the guide were subjected to a comprehensive review and revision.

FASB standards quoted are from FASB Accounting Standards Codification ©2015, Financial Accounting Foundation. All rights reserved. Used by permission.

GASB standards quoted are from GASB Statements, Concepts Statements, Interpretations, and Technical Bulletins, © 2018, Financial Accounting Foundation. All rights reserved. Used by permission.

FASB ASC Pending Content

Presentation of Pending Content in FASB ASC

Amendments to FASB ASC (issued in the form of ASUs) are initially incorporated into FASB ASC in pending content boxes below the paragraphs being amended with links to the transition information. The pending content boxes are meant to provide users with information about how the guidance in a paragraph will change as a result of the new guidance.

Pending content applies to different entities at different times due to varying fiscal year-ends, and because certain guidance may be effective on different dates for public and nonpublic entities. As such, FASB maintains amended guidance in pending content boxes within FASB ASC until the roll-off date. Generally, the roll-off date is six months following the latest fiscal year end for which the original guidance being amended could still be applied.

Presentation of FASB ASC Pending Content in AICPA Guides

Amended FASB ASC guidance that is included in pending content boxes in FASB ASC on September 1, 2018, is referenced as Pending Content in this guide. Readers should be aware that Pending Content referenced in this guide will eventually be subjected to FASB’s roll-off process and no longer be labeled as Pending Content in FASB ASC (as discussed in the previous paragraph).

Terms Used to Define Professional Requirements in This AICPA Guide

Any requirements described in this guide are normally referenced to the applicable standards or regulations from which they are derived. Generally the terms used in this guide describing the professional requirements of the referenced standard setter (for example, the ASB) are the same as those used in the applicable standards or regulations (for example, must or should). However, where the accounting requirements are derived from FASB ASC, this guide uses should, whereas FASB uses shall. In its resource document About the Codification that accompanies FASB ASC, FASB states that it considers the terms should and shall to be comparable terms and to represent the same concept—the requirement to apply a standard.

Readers should refer to the applicable standards and regulations for more information on the requirements imposed by the use of the various terms used to define professional requirements in the context of the standards and regulations in which they appear.

Certain exceptions apply to these general rules, particularly in those circumstances where the guide describes prevailing and/or preferred industry practices for the application of a standard or regulation. In these circumstances, the applicable senior committee responsible for reviewing the guide’s content believes the guidance contained herein is appropriate for the circumstances.

Applicability of Quality Control Standards

QC section 10, A Firm’s System of Quality Control,5 addresses a CPA firm’s responsibilities for its system of quality control for its accounting and auditing practice. A system of quality control consists of policies that a firm establishes and maintains to provide it with reasonable assurance that the firm and its personnel comply with professional standards, as well as applicable legal and regulatory requirements. The policies also provide the firm with reasonable assurance that reports issued by the firm are appropriate in the circumstances.

QC section 10 applies to all CPA firms with respect to engagements in their accounting and auditing practice. In paragraph .13 of QC section 10, an accounting and auditing practice is defined as a practice that performs engagements covered by this section, which are audit, attestation, compilation, review, and any other services for which standards have been promulgated by the AICPA ASB or the AICPA Accounting and Review Services Committee under the General Standards Rule (ET sec.1.300.001) or the Compliance With Standards Rule (ET sec. 1.310.001) of the AICPA Code of Professional Conduct. Although standards for other engagements may be promulgated by other AICPA technical committees, engagements performed in accordance with those standards are not encompassed in the definition of an accounting and auditing practice.

In addition to the provisions of QC section 10, readers should be aware of other sections within AICPA Professional Standards that address quality control considerations, including the following provisions that address engagement level quality control matters for various types of engagements that an accounting and auditing practice might perform:

•

AU-C section 220, Quality Control for an Engagement Conducted in Accordance With Generally Accepted Auditing Standards

•

AT-C section 105

•

AR-C section 60, General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services6

Because of the importance of engagement quality, this guide includes appendix H, Overview of Statements on Quality Control Standards. This appendix summarizes key aspects of the quality control standard. This summarization should be read in conjunction with QC section 10, AU-C section 220, AT-C section 105, AR-C section 60, and the quality control standards issued by the PCAOB, as applicable.

Applicability of Government Auditing Standards

In addition to GAAS, governmental gaming entities may also be required, or voluntarily elect, to have their audits performed in accordance with Government Auditing Standards (also referred to as the Yellow Book), issued by the Comptroller General of the United States. Auditors who perform audits under Government Auditing Standards should refer to AICPA Audit Guide Government Auditing Standards and Single Audits.

AICPA.org Website

The AICPA encourages you to visit the website at aicpa.org, and the Financial Reporting Center at www.aicpa.org/frc. The Financial Reporting Center supports members in the execution of high-quality financial reporting. Whether you are a financial statement preparer or a member in public practice, this center provides exclusive member-only resources for the entire financial reporting process, and provides timely and relevant news, guidance and examples supporting the financial reporting process. Another important focus of the Financial Reporting Center is keeping those in public practice up to date on issues pertaining to preparation, compilation, review, audit, attestation, assurance and advisory engagements. Certain content on the AICPA’s websites referenced in this guide may be restricted to AICPA members only.

Alternatives Within U.S. GAAP

The Private Company Council (PCC), established by the Financial Accounting Foundation’s Board of Trustees in 2012, and FASB, working jointly, will mutually agree on a set of criteria to decide whether and when alternatives within U.S. GAAP are warranted for private companies. Based on those criteria, the PCC reviews and proposes alternatives within U.S. GAAP to address the needs of users of private company financial statements. These U.S. GAAP alternatives may be applied to those entities that are not public business entities, not-for-profits, or employee benefit plans.

The FASB ASC master glossary defines a public business entity as

A public business entity is a business entity meeting any one of the criteria below. Neither a not-for-profit entity nor an employee benefit plan is a business entity.

a)    

It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).

b)    

It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.

c)    

It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.

d)    

It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.

e)    

It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.

An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.

Considerations related to alternatives for private companies may be discussed within this guide’s chapter text. When such discussion is provided, the related paragraphs are designated with the following title: Considerations for Private Companies that elect to use Standards as Issued by the Private Company Council.

Select Recent Developments Significant to This Guide

FASB ASC 606, Revenue from Contracts With Customers

FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), and related guidance in subsequently issued ASUs, is effective for annual reporting periods of public business entities, certain not-for-profits and certain employee benefit plans, beginning after December 15, 2017, including interim periods within that reporting period. Earlier application would be permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

All other nongovernmental entities, would apply the guidance in ASU No. 2014-09 to annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Application would be permitted earlier only as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period, or an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which an entity first applies the guidance in ASU No. 2014-09.

The AICPA has formed sixteen industry task forces to assist in developing a new accounting guide on revenue recognition that will provide helpful hints and illustrative examples for how to apply the new standard. Information regarding these task forces can be found at www.aicpa.org/revenuerecognition. Finalized revenue recognition implementation issues for a given industry are published in a quarterly edition of the AICPA Audit and Accounting Guide Revenue Recognition. The revenue recognition implementation issues related to the gaming industry are found in chapter 6, Gaming Entities, of that guide.

In this guide, revenue recognition implementation issues, as found in chapter 6, Gaming Entities, of the AICPA Revenue Recognition guide, are found in appendix J, Revenue Recognition Implementation Issues. These implementation issues affect content in a number of places throughout the guide, including content in chapters, appendixes, and the glossary. Guide content will be updated in a future edition of the guide.

Government Auditing Standards, 2018 Revision

On July 17, 2018 the Government Accountability Office released the 2018 Revision of Government Auditing Standards (GAGAS or the Yellow Book). The standards are available at https://www.gao.gov/yellowbook/overview. Government Auditing Standards, 2018 Revision, is effective for financial audits, attestation engagements, and reviews of financial statements for periods ending on or after June 30, 2020, and for performance audits beginning on or after July 1, 2019. Early implementation is not permitted. Upon their effective date, Government Auditing Standards, 2018 Revision, will supersede Government Auditing Standards, 2011 Revision.

Notes

1 All AU-C sections can be found in AICPA Professional Standards.

2 All AT-C sections can be found in AICPA Professional Standards.

3 All ET sections can be found in AICPA Professional Standards.

4 All AUD sections can be found in AICPA Professional Standards.

5 All QC sections can be found in AICPA Professional Standards.

6 All AR-C sections can be found in AICPA Professional Standards.

__________________________

TABLE OF CONTENTS

Chapter

1 Industry Overview

Gaming in the United States

Casino Gaming

Native American Gaming

Lotteries

Other Gaming

Regulation and Oversight

Brief Descriptions of the Games

Table Games

Card Games

Slot Machines

Keno

Bingo

Race and Sports Betting

Online Real Money Gaming

2 Guide Scope and Applicability

3 Overview of Gaming and Gaming Related Revenue

Introduction

Overview of Transactions in the Casino and the Casino Cage

Overview of Table Game Transactions

Overview of Incentive Programs in the Gaming Industry

4 Jackpot Liabilities

Background

Summary of Selected Accounting Literature

Types of Jackpots for Purposes of Accounting for Jackpot Liabilities

Accounting for Jackpots

5 Participation and Similar Arrangements

Background

Summary of Selected Accounting Literature

Analysis of Lease Criteria for Various Pricing Arrangements

Conclusions and Income Statement Presentation

6 Loyalty and Incentive Programs

Summary of Selected Accounting Literature

General Description of, and Accounting for, Loyalty and Incentive Programs

Discretionary Incentive Programs

Nondiscretionary Incentive Programs

Specific Accounting for Various Discretionary Incentives

Free Play Offered Other Than Through Loyalty Programs

Cash or Cash Equivalents Offered Other Than Through Loyalty Programs

Complimentaries Offered Other Than Through Loyalty Programs

Specific Accounting for Various Nondiscretionary Incentives

Free Play Offered Through Nondiscretionary Loyalty Programs

Cash or Cash Equivalents Offered Through Nondiscretionary Loyalty Programs

Complimentaries Offered Through Nondiscretionary Loyalty Programs

Nondiscretionary Loyalty Programs in Which Customers Have the Option of Choosing Multiple Types of Incentives

Incentive Programs That Provide Customers With Designated Status Without Entitling Customers to Any Economic Benefits

Financial Statement Disclosures

7 Gaming License, Project Development, and Preopening and Start-Up Costs

Background

Summary of Selected Accounting Literature

Costs to Obtain a Gaming License

Project Development Costs

Preopening and Start-Up Costs

8 Managing Properties for Third Parties

Background

Summary of Selected Accounting Literature

Accounting by the Gaming Entity Managing the Third Party Owned Property

Gaming Entity’s Costs Prior to Obtaining the Management Agreement

Gaming Entity’s Costs Related to an Existing Management Agreement

Financial Statement Classification of Amounts Paid on Behalf of the Managed Property

Accounting by the Managed Property

Disclosures

9 Guarantees

Introduction

Summary of Selected Accounting Literature

Initial Recognition and Measurement of the Guarantee

Income Statement Effect at Initial Recognition

Classification of the Contract or Customer Acquisition Cost

Subsequent Measurement of the Liability

Subsequent Measurement of the Asset

Financial Statement Disclosures

Applicability of FASB ASC 810, Consolidation

10 Long-Lived Assets

Introduction

Summary of Selected Accounting Literature

Long-Lived Assets to Be Held and Used

Triggering Events

Grouping Long-Lived Assets to Be Held and Used and Related Issues

Estimates of Future Cash Flows Used to Test a Long-Lived Asset for Recoverability

Asset Retirement Obligations

11 Other Accounting Topics

Intangible Assets Acquired in a Business Combination

Jackpot Insurance

Background

Characteristics of Jackpot Insurance Policies

Accounting for Jackpot Insurance

Gaming Chips and Tokens Liabilities

Racetrack Fees

Background

Accounting for Racetrack Fees

Segment Reporting

Uniforms and Other Long-Lived Assets

Deferred Income Taxes for Casinos

12 Governmental Gaming Entities

Background

GAAP Hierarchy for Governmental Gaming Entities

Summary of Selected Accounting Literature

Basic Financial Statements and Required Supplementary Information

Resource Flows Between Governmental Gaming Entities and Sponsoring Governments

Allocation of Assets and Liabilities Within the Financial Reporting Entity

Impairment of Capital Assets

Segment Reporting

13 General Auditing Considerations

Introduction

Terms of Engagement

Opening Balances — Initial Audit Engagements, Including Reaudit Engagements

An Audit of Financial Statements

Planning the Audit

Audit Risk

Use of Assertions in Obtaining Audit Evidence in the Assessment of Risks of Material Misstatement

Materiality

Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement

Discussion Among the Audit Team

Industry Risk Factors

Related Parties

Responsibilities of the Auditor

Risk Assessment Procedures

Designing and Performing Further Audit Procedures

Identification of Significant Risks

Analytical Procedures Used in Risk Assessment

Understanding of Internal Control

IT Considerations

Consideration of Fraud in a Financial Statement Audit

Introduction

Professional Skepticism

Discussion Among the Engagement Team

Incentives or Pressures

Opportunities

Attitudes and Rationalizations

Misappropriation of Assets

Risk Assessment Procedures and Related Activities

Identification and Assessment of the Risks of Material Misstatement Due to Fraud

Responses to the Assessed Risks of Material Misstatement Due to Fraud

Evaluation of Audit Evidence

Auditor Unable to Continue the Engagement

Communications to Management and With Those Charged With Governance

Documentation

Consideration of Laws and Regulations

Responsibility for Compliance With Laws and Regulations

Audit Performance and Execution

Designing and Performing Further Audit Procedures

Timing of Audit Procedures

Analytical Procedures Used in Audit Performance

Audit Documentation

Timely Preparation of Audit Documentation

Assembly and Retention of the Final Audit File

Auditor's Consideration of Using the Work of Internal Auditors

Using the Work of Other Specialists

Evaluation of Misstatements Identified During the Audit

Written Representations

Written Representations as Audit Evidence

Communication With Those Charged With Governance

Auditor’s Consideration of Going Concern

Risk Assessment Procedures and Related Activities

Additional Audit Procedures

Consideration of Conditions and Events

Auditor Conclusions

Communicate With Those Charged With Governance

Documentation

Group Audit Engagements

Definition of a Component

Group Audit Technical Practice Aid

Other Information, Supplementary Information, and Required Supplementary Information

14 Special Auditing Considerations

Cash Balances and Revenue Cutoff

Components of Cage Accountability

Cage Procedures

Tests of Accountability

Cutoff Procedures

Table Games

Slot Machines

Other Games

Online Gaming

Drop and Count Procedures

Receivables

Background

External Confirmation of Gaming Receivables

Mail Circularization

Oral Responses

Alternative Procedures When No Reply Is Received

Branch Offices

Allowance for Doubtful Accounts

Special Considerations for New Gaming Operations

Unannounced Audit Procedures

15 Internal Control

Introduction

Gaming Internal Control Considerations

Granting and Control of Credit

Approval of Credit Lines and Maintenance of Credit Files

Issuance of Credit

Recording of Credit Transactions

Custody of Markers

Bingo

Cage

Card Games

Gaming Tournaments

Information Technology

Keno

Lotteries

Promotions and Incentive Programs

Race and Sports Book (for Computerized Systems)

Slot Machines

Table Games

16 Analytical Procedures

Introduction

Types of Analytical Procedures

Table Games and Poker

Appendix

A Category B Guidance

B The New Revenue Recognition Standard: FASB ASC 606

C Illustrative Financial Statements

D Illustrative Guidance When Accounting for Guarantees

E The New Jersey Casino Reinvestment Development Authority

F Currency Transaction Reporting in the Gaming Industry

G Rules of the Games

H Overview of Statements on Quality Control Standards

I The New Leases Standard: FASB ASC 842

J Revenue Recognition Implementation Issues

K Schedule of Changes Made to the Text From the Previous Edition

Glossary

EULA

__________________________

Chapter 1

Industry Overview

Gaming in the United States

Casino Gaming

1.01 The modern era of gaming in the United States began in 1931 in Nevada, when the so-called wide-open gaming bill was passed. The passage of the bill was precipitated by (a) dissatisfaction with widespread illegal gaming, (b) the influence of the mining camp heritage, and (c) hopes for general enhancement of business within the state, which was suffering severely during the Depression.

1.02 A turning point in Nevada’s gaming history came in late 1946, when the Flamingo Hotel opened outside the Las Vegas city limits. The Flamingo’s financial success prompted the development of several new hotel-casinos. Initially, the casinos in Reno and Las Vegas catered mostly to local residents. However, with the introduction of the larger casinos, gaming became big business.

1.03 In 1950, a Senate committee conducted a study of Nevada casinos. As a result of its report, Nevada and the federal government expanded their control efforts. In 1959, the Nevada Gaming Commission was created as the state’s authority on licensing and disciplinary matters, and the Gaming Control Board was established as the active operating regulatory authority over the daily activities of Nevada casinos.

1.04 Gaming became a licensed and strictly regulated activity throughout Nevada. In the late 1960s, under pressure from the federal government, Nevada passed the Corporate Gaming Act. This heralded the era of public corporate ownership and created the framework for regulation of the industry.

1.05 In 1976, New Jersey voters passed a referendum allowing casino gaming in Atlantic City. It was hoped that casino gaming would contribute to the redevelopment of Atlantic City. In 1978, the first Atlantic City casino, Resorts International, opened on the boardwalk. As of 2017, 7 casinos resided on the boardwalk and in its marina area.

1.06 The proliferation of gaming continued and spread outside of the Nevada and New Jersey markets and into the newly formed riverboat gaming markets. In July 1989, Iowa legalized riverboat gaming, and eight other states followed suit.

1.07 Commercial casinos include land based, limited stakes, riverboat, dockside, and racetrack casinos (such facilities are commonly referred to as racinos, which are racetracks where slot machines1or video lottery terminals have also been installed). Such forms of gaming are currently conducted in numerous states. Much of the revenue growth in gaming has resulted from the introduction of gaming into new jurisdictions. Land-based casinos traditionally include slot machines, table games, race and sports books, bingo, and keno. (See table 1-1 in paragraph 1.19)

1.08 Each state provides regulations for the gaming format, whether there are limitations on betting limits and hours of operation, admission fees, and the tax rate(s) and how they are collected and spent.

1.09 Gaming is legal in many areas of the world. Some of the casinos in other parts of the world are owned by publicly held companies based in the United States.

Native American Gaming

1.10 Legalized gaming in the United States includes gaming activities sanctioned and conducted by Native American tribes. Native American gaming is regulated in three ways: by the federal government through the National Indian Gaming Commission, by states through authority granted by the negotiated tribal state compacts, and by individual tribes through their gaming regulatory authorities established for that purpose. A compact is an intergovernmental agreement between a tribal government and a state government. The Indian Gaming Regulatory Act of 1988 (IGRA) requires negotiation of such compacts as the legal basis for Native American gaming.

1.11 IGRA classified gaming into three classifications:

•

Class I provides for social or traditional games played in conjunction with tribal ceremonies.

•

Class II provides for nonbanked card games that are played exclusively against other players, such as bingo and other related games that would normally be played in conjunction with bingo, such as pulltabs and punchboards; other related gaming activities are also included in this class.

•

Class III provides for such games as slot machines, house-banked table games, and keno.

Regulations of each class of gaming are determined by tribal-state compacts and the provisions of IGRA.

Lotteries

1.12 A lottery is a popular form of gaming that involves the drawing of lots for a prize. Lotteries have been conducted in various forms for centuries and are typically operated by government agencies or charitable organizations. In the United States, lotteries are typically operated by state governments and are subject to the laws of each state. The first modern state lottery was established in New Hampshire in 1964, and 44 states and the District of Columbia operate some form of a lottery. Additionally, lottery associations operate interstate lottery games (for example, Powerball, Mega Millions), which results in increased ticket sales and larger payouts than normally found in a single state lottery.

1.13 Whereas a traditional gaming entity operates games solely at the licensed gaming facility, a lottery uses authorized agents at retail outlets to sell lottery tickets and cash winning tickets. The use of off-site agents is a significant difference between a traditional gaming entity's operations and lotteries. The various methods of conducting lotteries are described in appendix G, Rules of the Games.

1.14 Lotteries are entitled to proceeds from the sale of lotto tickets and instant game tickets and are responsible for payouts on winning tickets. Agents receive a commission based on a percentage of the dollar amount of tickets sold. Agents may also receive other payments, such as a bonus, when a major prize is won on a ticket sold at the agent’s retail outlet. The win from video lottery terminals will typically be shared between the agent and the lottery at a rate determined by statute or regulation. A reconciliation is typically performed on a weekly basis, taking into consideration agent ticket sales, payouts, and commissions, with an electronic funds transfer made either to or from the central lottery office, depending on cash flow at the retail outlet for that week. Lotteries also typically generate revenues from license fees collected from the agents.

1.15 Proceeds from ticket sales are distributed pursuant to legislative or regulatory allocation requirements. For example, a typical breakdown might be (a) 55 percent returned to patrons as prizes; (b) 33 percent to fund education, health care, transportation, or other similar state budget items; (c) 7 percent commission to agents; and (d) 5 percent to fund lottery operating costs.

1.16 Gaming entities subject to the governmental generally accepted accounting principles hierarchy are referred to as governmental throughout this guide. Such entities should refer to chapter 12, Governmental Gaming Entities, of this guide for additional guidance specific to governmental entities, as well as certain sections of chapter 3, Overview of Gaming and Gaming Related Revenue.

Other Gaming

1.17 Gaming is also conducted through various charitable organizations, through slot routes at convenience and grocery stores, on cruise ships, over the internet, and on horse and greyhound races at race tracks and off-track betting sites. Cruise ship gaming is typically conducted only in international waters, where U.S. laws do not apply.

1.18 Gaming has proliferated across the United States in recent years and is now available in some form in every state except Hawaii and Utah. Proliferation is likely to continue as states use taxes and license fees to supplement state budgets.

1.19 The following table illustrates legalized gaming activities throughout the United States.

Table 1-1

Nature of Legalized Gaming Throughout the United States

1.20 Limited stakes gaming represents gaming operations in which only slot machines and table games with relatively low maximum bet limits are permitted.

1.21 Card rooms allow only nonbanked table games, and in the state of Washington, restrict the number of tables and betting limits.

1.22 Internet gaming companies have been formed to provide online gaming and sports betting over the internet. The legality of such forms of gaming continues to be debated and challenged throughout the world and was deemed to be illegal in the United States especially as a result of the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA). Subsequent federal government bills and interpretations of the UIGEA have provided for the legalization and regulation of online poker and some other forms of online gaming at the individual state level. As of the end of 2017, the states of Nevada, New Jersey, and Delaware have legalized online gaming conducted and operated within their state.

1.23 Many gaming facilities have become large scale, destination resorts. Owners have invested significant amounts of capital in the physical plants of these facilities and derive a large portion of their revenues from ancillary sources including hotel, food and beverage, convention facilities, entertainment, and retail operations.

1.24 Gaming equipment manufacturers have also developed structures whereby they conduct gaming activities. The gaming equipment manufacturer may maintain ownership of the machine and also may share in the proceeds from the gaming activities.2

Regulation and Oversight

1.25 The ownership and operation of gaming facilities in the United States are subject to a number of state, local, and tribal laws, regulations, and ordinances. These laws and regulations concern the responsibility, financial stability, and character of gaming operators and persons financially interested or involved in gaming operations.

1.26 Gaming entities are licensed by state, local, and tribal gaming regulatory authorities. The licenses are not transferable and may be renewed periodically. The licensing authorities have broad discretion in granting and renewing licenses. Currently, state laws dictate and regulate the conduct of online gaming conducted and offered within the individual state. Online gaming conducted across state lines is considered illegal in accordance with the UIGEA.

1.27 Officers, directors, and certain key employees of a gaming entity must be licensed by the gaming regulatory authorities, and employees associated with gaming must often obtain licenses, work permits, or employee registrations. The gaming authorities have the power to require the gaming entity to (a) suspend or dismiss officers, directors, or other key employees, or (b) sever relationships with other persons who refuse to file appropriate applications or whom the authorities find unsuitable to act in such capacities. Certain jurisdictions require all employees of the entities that service the gaming industry to also be licensed.

1.28 If it is determined that gaming laws have been violated, a gaming entity’s gaming license can be limited, conditioned, suspended, or revoked, and the gaming entity and persons involved may be subject to fines at the discretion of the applicable regulatory authorities.

1.29 No person may acquire control of a gaming entity (whether by ownership of securities, agreement, or otherwise) without the prior approval of the gaming authorities. The authorities may require controlling stockholders, officers, directors, and other persons having a substantial relationship or involvement with the gaming entity to be found suitable for that relationship or involvement or to be licensed. The gaming authorities have the power to investigate any principal security holder.

1.30 To be licensed, the gaming entity may give up certain management flexibility and may also be subject to requirements that do not apply to business entities in general. For example, some jurisdictions legislate detailed provisions concerning (a) employment practices of casino operators, contractors for gaming entities, and others; (b) security standards, management control activities, accounting and cash control methods, and reports to gaming authorities; (c) advertising, standards for entertainment, and distribution of alcoholic beverages; and (d) purchases of gaming equipment.

1.31 For the operating methods that the gaming entities will use, some jurisdictions prescribe (a) the rules of the games, including minimum and maximum wagers and the manner of selling and redeeming chips, and (b) the manner of granting credit, the duration of credit, and the enforceability of gaming debts.

1.32 Gaming entities are generally required to file with regulatory agencies reports describing, in narrative and diagrammatic form, detailed operating procedures for gaming and gaming related activities that meet certain specified minimum standards. An accounting system and internal control policies and procedures must be established before a gaming entity's operations begin. The systems, and any significant revisions to them, may be evaluated and reported on by an independent auditor and are subject to review by the regulatory agencies.

1.33 Gaming entities are generally charged a fee or tax based on a percent of gross gaming revenue by the state in which they operate. Such fees are often also assessed by tribal governments on gaming entities operating within their jurisdiction. County and city license fees are also common. Local jurisdictions sometimes require a gaming entity to pay a deposit to ensure that the locality receives the tax revenue even if the gaming entity ceases to operate.

1.34 In addition to the gross revenue fee or tax imposed by states, tribes, and local governments, the federal government imposes taxes and fees on certain gaming activities. For example, a wagering tax is levied by the federal government on race and sports book operators. This tax is based on a percentage of the amount wagered by customers.

1.35 In addition to the aforementioned fees and taxes, the operating costs of gaming, regulatory, and investigatory agencies may be passed on to gaming entities in the form of fees.

1.36 Publicly held gaming entities are generally subject to requirements of federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934 (the 1934 Act). Entities whose securities are registered under the 1934 Act must comply with its reporting requirements through periodic filings with the Securities and Exchange Commission.

1.37 Provisions of many other federal and state laws affect the operation of gaming operators, such as the following:

•

In 1984, the New Jersey Casino Reinvestment Development Authority (CRDA) was created. The purpose of CRDA is to maintain public confidence in the gaming industry by directly facilitating the redevelopment of Atlantic County as well as assessing and addressing the pressing social and economic needs of its residents. (See appendix E, The New Jersey Casino Reinvestment Development Authority, for additional details.)

•

Under IGRA, net revenues from Class II or Class III gaming, as defined by IGRA, may be used to make per capita payments to members of the tribe only when certain conditions are met.

•

To deter and prevent criminal activity, especially money laundering, regulations promulgated under the authority of the Bank Secrecy Act of 1970 (BSA) and the USA Patriot Act of 2001 were enacted. For additional guidance concerning this and other acts, refer to appendix F, Currency Transaction Reporting in the Gaming Industry. Gaming entities are considered financial institutions and must comply with BSA requirements.

•

Gaming entities are subject to various laws, regulations, and other requirements related to the privacy of customer information. Many states have passed laws requiring notice to state residents if their personal information has been compromised. In addition, gaming entities processing credit card transactions may be subject to additional protection requirements regarding the personal information of a credit card issuer’s customer.

•

The Professional and Amateur Sports Protection Act (PASPA) was passed in 1992 for the stated purpose of protecting the integrity of sports. As a part of the protection process, PASPA banned sports betting in all but a few U.S. states. In 2018 the Supreme Court declared the federal law unconstitutional. This leaves it up to individual states to determine the legality of sports betting.

Brief Descriptions of the Games

1.38 The jurisdiction where the gaming entity is located determines the types of games of chance that the gaming entity may operate. The following are brief descriptions of the games most likely to be found in a gaming entity. Online gaming functions similar to a normal gaming entity in terms of the games offered. The individual laws and regulations of each jurisdiction determine what games can be legally offered online. Refer to paragraph 1.46 for additional information. More detailed descriptions of some of these games are included in appendix G.

Table Games

1.39 As would be expected, table games are simply those that are played at a table and involve one or more players usually wagering against the gaming entity's bankroll. The table may include a layout — a diagram, usually on felt, with spaces for the bets to be placed. The house is represented by dealers, which is a general term that may include stickpersons and boxpersons. The most common table games are as follows:

•

Craps

•

Blackjack, or Twenty-One

•

Pai-Gow Poker

•

Roulette

•

Wheel of Fortune, or Big Six

•

Baccarat

•

War

Card Games

1.40 Card games, such as poker and panguingui (pan), differ from table games in that the customers wager against each other rather than against the gaming entity's bankroll. The revenue derived by the casino is merely a percentage rake-off or a time buy-in — a commission charged by the house for the privilege of playing in the establishment.

Slot Machines

1.41 Slot machines are devices in which the player generally deposits one or more coins for a chance to win a jackpot or other payoff. Payoffs may be based on the alignment of like symbols appearing on three or more narrow cylindrical drums, called reels, but many variations exist. These devices may also be machines that simulate other games, such as poker or blackjack, on a video screen. In addition, gaming equipment manufacturers have offered wide area progressive systems to gaming entities. These systems provide the gaming entity with the ability to provide significantly larger jackpot offerings and, at the same time, reduce the gaming entity's risk for funding the jackpot. Typically, the progressive amount increases as a function of each coin played in any machine linked to the system among the participating gaming facilities. The industry is rapidly changing to coinless slot machines. Customers use currency and play the machine against credits representing the amount of the currency placed in the machine. This credit, which is displayed prominently on the face of the machine, goes up or down as the customer wins and loses their wagers. At the completion of playing, the customer redeems their credits for a wagering voucher, commonly referred to as a ticket. This ticket can be reintroduced to any machine at that gaming entity equipped with this technology or redeemed with a cashier or at a redemption kiosk. This cashless wagering process is commonly referred to as ticket in, ticket out, or TITO.

1.42 Conventional slot machines operate independently from other slot machines and contain control programs that determine the outcome of each wager. However, technological advances have been made that allow slot machines to interface with server based gaming systems whereby game outcomes are determined by the system (system based games) or control programs within the slot machines, which can be changed from the system (system supported games).

Keno

1.43 A keno ticket bears a selection of numbers from 1 to 80. These numbers correspond to 80 numbered Ping-Pong-like balls contained in a special holding unit. Generally, 20 balls are then drawn randomly, and winning wagers are determined by how many numbers on the customer’s ticket match those drawn.

Bingo

1.44 A bingo ticket has 5 rows of 5 numbers each, a total of 25 numbers. As numbers are selected at random by the gaming entity, the players cover any corresponding numbers on their cards. The first customer to cover a specified row, column, or design